SOLUTION MANUAL FOR
d d
dPrinciples Of Auditing And Other Assurance Services
d d d d d d d
23rd Edition By Ray Whittington Kurt
d d d d d d
ALL Chapters (1 - 21)
d d d d
, Table of Contents d d
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
d d d d d d d d d d
Chapter 2: Professional Standards
d d d
Chapter 3: Professional Ethics
d d d
Chapter 4: Legal Liability of CPAs
d d d d d
Chapter 5: Audit Evidence and Documentation
d d d d d
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
d d d d d d d d d
Chapter 7: Internal Control
d d d
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
d d d d d d d d d
Chapter 9: Audit Sampling
d d d
Chapter 10: Cash and Financial Investments
d d d d d
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
d d d d d d
Chapter 12: Inventories and Cost of Goods Sold
d d d d d d d
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
d d d d d d d
Chapter 14: Accounts Payable and Other Liabilities
d d d d d d
Chapter 15: Debt and Equity Capital
d d d d d
Chapter 16: Auditing Operations and Completing the Audit
d d d d d d d
Chapter 17: Auditors’ Reports
d d d
Chapter 18: Integrated Audits of Public Companies
d d d d d d
Chapter 19: Additional Assurance Services: Historical FinancialInformation
d d d d d d
Chapter 20: Additional Assurance Services: Other Information
d d d d d d
Chapter 21: Internal, Operational, and Compliance Auditing
d d d d d d
,CHAPTER 1 d
The Role of the d d d
d Public Accountant in the d d d
American Economy d
Review Questions
d
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
d d d d d d d d d d d d d d d
financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
d d d d d d d d d d d d d d d
visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
d d d d d d d d d d d d d d d
companies in American history to do so. The extent of the accounting irregularities and fraud being
d d d d d d d d d d d d d d d d
investigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
d d d d d d d d d d d d d d
the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
d d d d d d d d d d d d d d d d d d
destroying documents related to the Enron case brought into question the ethics standards of the profession.
d d d d d d d d d d d d d d d d
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
d d d d d d d d d d d d d d
decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
d d d d d d d d d d d d d d d d d
involve putting information in a form or context that facilitates decision-making.
d d d d d d d d d d d
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
d d d d d d d d d d d d d d d
assertion,made by management, most frequently is that the financial statements follow generally accepted
d d d d d d d d d d d d d d
accounting principles.
d d
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
d d d d d d d d d d d d d d d d d d
and by the rules of the Securities and Exchange Commission to provide an audit report with theannual
d d d d d d d d d d d d d d d d d d
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an
d d d d d d d d d d d d d d d d d
opinion on its internal control. Apart from legal requirements, however, a large listed corporation
d d d d d d d d d d d d d d
recognizes that it must maintain investor confidence in the reliability of its financial statements and internal
d d d d d d d d d d d d d d d d
control over financial reporting if it is to continue to be able to secure capital from the public. The report by a
d d d d d d d d d d d d d d d d d d d d d d
firm of certified public accountants adds credibility to the financial statements prepared by the corporation.
d d d d d d d d d d d d d d d
dWhen a small family-owned enterprise elects to have an audit, the purpose usually is to use the auditors'
d d d d d d d d d d d d d d d d d
report to support an application for a bank loan.
d d d d d d d d d
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
d d d d d d d d d d d d d d d
commonly required in the following situations:
d d d d d d
(1) Application for a bank loan. d d d d
(2) Establishing credit for purchase of merchandise, equipment, or other assets. d d d d d d d d d
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor d d d d d d d d d d d d
partners).
d
(4) Issuance of securities by a corporation. d d d d d
(5) Annual financial statements by a corporation with securities listed on a stock exchange or
d d d d d d d d d d d d d
tradedover the counter.
d d d d
(6) Sale of an ongoing business. d d d d
(7) Termination of a partnership. d d d
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared following
d d d d d d d d d d d d d d d d
the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibility
d d d d d d d d d d d d d d
results in financial statements that can be believed and relied upon by third parties.
d d d d d d d d d d d d d d
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable
d d d d d d d d d d d d d d d d d
tomeet its financial obligations due to economic conditions or poor management decisions. Information
d d d d d d d d d d d d d d
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly reduce
d d d d d d d d d d d d d d d d d d d
information risk, but have only limited effect on business risk.
d d d d d d d d d d
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud.
d d d d d d d d d d d d d d d d d
Audit work centered on the balance sheet, because the income statement was regarded as highly confidential
d d d d d d d d d d d d d d d d
and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the
d d d d d d d d d d d d d d d d d d
fairness of financial statements and their conformity with generally accepted accounting principles. But the
d d d d d d d d d d d d d d
professional standards also require that an audit be designed to provide reasonable assurance of detecting
d d d d d d d d d d d d d d d
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement
d d d d d d d d d d d d d d d
which is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements
d d d d d d d d d d d d d d d d d
of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board
d d d d d d d d d d d d d d
for public companies.
d d d
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
d d d d d d d d d d d d
auditprocedures make audited entire populations a possibility in many situations.
d d d d d d d d d d d
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
d d d d d d d d d d d d d d d
organization. It involves more subjective judgments than a compliance audit or an audit of financial
d d d d d d d d d d d d d d d
statements because the criteria of effectiveness and efficiency of departmental performance are not
d d d d d d d d d d d d d
asclearly established as are many laws and regulations or generally accepted accounting principles.
d d d d d d d d d d d d d d
The report prepared after completion of an operational audit is usually directed to managementof
d d d d d d d d d d d d d d
the organization in which the audit work was done.
d d d d d d d d d
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
d d d d d d d d d d d d d d d d
with established criteria. The necessary ingredients are verifiable data and the existence of standards
d d d d d d d d d d d d d d
established by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
d d d d d d d d d d d d d d d d d d d
other unit of a business or governmental organization to measure the effectiveness and efficiency of
d d d d d d d d d d d d d d d
operations. Internal auditors often perform operational audits as do auditors employed by the Government
d d d d d d d d d d d d d d
Accountability Office (GAO) of the federal government.
d d d d d d d
1-12 Internal auditors must be independent of the department heads and other line executives whose work
d d d d d d d d d d d d d d
theyreview. However, internal auditors are not independent in the same sense as a public accounting firm.
d d d d d d d d d d d d d d d d d
d d
dPrinciples Of Auditing And Other Assurance Services
d d d d d d d
23rd Edition By Ray Whittington Kurt
d d d d d d
ALL Chapters (1 - 21)
d d d d
, Table of Contents d d
Chapter 1: The Role of the Public Accountant in the AmericanEconomy
d d d d d d d d d d
Chapter 2: Professional Standards
d d d
Chapter 3: Professional Ethics
d d d
Chapter 4: Legal Liability of CPAs
d d d d d
Chapter 5: Audit Evidence and Documentation
d d d d d
Chapter 6: Audit Planning, Understanding the Client, AssessingRisks, and Responding
d d d d d d d d d
Chapter 7: Internal Control
d d d
Chapter 8: Consideration of Internal Control in an InformationTechnology Environment
d d d d d d d d d
Chapter 9: Audit Sampling
d d d
Chapter 10: Cash and Financial Investments
d d d d d
Chapter 11: Accounts Receivable, Notes Receivable, andRevenue
d d d d d d
Chapter 12: Inventories and Cost of Goods Sold
d d d d d d d
Chapter 13: Property, Plant, and Equipment: Depreciation andDepletion
d d d d d d d
Chapter 14: Accounts Payable and Other Liabilities
d d d d d d
Chapter 15: Debt and Equity Capital
d d d d d
Chapter 16: Auditing Operations and Completing the Audit
d d d d d d d
Chapter 17: Auditors’ Reports
d d d
Chapter 18: Integrated Audits of Public Companies
d d d d d d
Chapter 19: Additional Assurance Services: Historical FinancialInformation
d d d d d d
Chapter 20: Additional Assurance Services: Other Information
d d d d d d
Chapter 21: Internal, Operational, and Compliance Auditing
d d d d d d
,CHAPTER 1 d
The Role of the d d d
d Public Accountant in the d d d
American Economy d
Review Questions
d
1-1 The ―crisis of credibility‖ largely arose from the number of companies that restated their previously issued
d d d d d d d d d d d d d d d
financial statements as a result of accounting irregularities and fraud. Especially responsible werethe very
d d d d d d d d d d d d d d d
visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest
d d d d d d d d d d d d d d d
companies in American history to do so. The extent of the accounting irregularities and fraud being
d d d d d d d d d d d d d d d d
investigated and disclosed brought into question the effectiveness of financial statement audits. In addition,
d d d d d d d d d d d d d d
the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
d d d d d d d d d d d d d d d d d d
destroying documents related to the Enron case brought into question the ethics standards of the profession.
d d d d d d d d d d d d d d d d
1-2 Assurance services are professional services that enhance the quality of information, or its context, for
d d d d d d d d d d d d d d
decision-making. The two types are: (a) those that increase the reliability of information and (b) those that
d d d d d d d d d d d d d d d d d
involve putting information in a form or context that facilitates decision-making.
d d d d d d d d d d d
1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall
d d d d d d d d d d d d d d d
assertion,made by management, most frequently is that the financial statements follow generally accepted
d d d d d d d d d d d d d d
accounting principles.
d d
1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange
d d d d d d d d d d d d d d d d d d
and by the rules of the Securities and Exchange Commission to provide an audit report with theannual
d d d d d d d d d d d d d d d d d d
financial statements furnished to its stockholders. It also is required to engage the auditors to provide an
d d d d d d d d d d d d d d d d d
opinion on its internal control. Apart from legal requirements, however, a large listed corporation
d d d d d d d d d d d d d d
recognizes that it must maintain investor confidence in the reliability of its financial statements and internal
d d d d d d d d d d d d d d d d
control over financial reporting if it is to continue to be able to secure capital from the public. The report by a
d d d d d d d d d d d d d d d d d d d d d d
firm of certified public accountants adds credibility to the financial statements prepared by the corporation.
d d d d d d d d d d d d d d d
dWhen a small family-owned enterprise elects to have an audit, the purpose usually is to use the auditors'
d d d d d d d d d d d d d d d d d
report to support an application for a bank loan.
d d d d d d d d d
, 1-5 A report by an independent public accountant concerning the fairness of a company's financial statementsis
d d d d d d d d d d d d d d d
commonly required in the following situations:
d d d d d d
(1) Application for a bank loan. d d d d
(2) Establishing credit for purchase of merchandise, equipment, or other assets. d d d d d d d d d
(3) Reporting operating results, financial position, and cash flows to absentee owners (stockholdersor d d d d d d d d d d d d
partners).
d
(4) Issuance of securities by a corporation. d d d d d
(5) Annual financial statements by a corporation with securities listed on a stock exchange or
d d d d d d d d d d d d d
tradedover the counter.
d d d d
(6) Sale of an ongoing business. d d d d
(7) Termination of a partnership. d d d
1-6 To add credibility to financial statements is to increase the likelihood that they have been prepared following
d d d d d d d d d d d d d d d d
the appropriate criteria, usually generally accepted accounting principles. As such, an increasein credibility
d d d d d d d d d d d d d d
results in financial statements that can be believed and relied upon by third parties.
d d d d d d d d d d d d d d
1-7 Business risk is the risk that the investment will be impaired because a company invested in is unable
d d d d d d d d d d d d d d d d d
tomeet its financial obligations due to economic conditions or poor management decisions. Information
d d d d d d d d d d d d d d
risk is the risk that the information used to assess business risk is not accurate. Auditors can directly reduce
d d d d d d d d d d d d d d d d d d d
information risk, but have only limited effect on business risk.
d d d d d d d d d d
1-8 At the beginning of the century, the principal objective of auditing was the prevention and detection of fraud.
d d d d d d d d d d d d d d d d d
Audit work centered on the balance sheet, because the income statement was regarded as highly confidential
d d d d d d d d d d d d d d d d
and not for public disclosure. Today, the principal objective of auditing is to form an opinion on the
d d d d d d d d d d d d d d d d d d
fairness of financial statements and their conformity with generally accepted accounting principles. But the
d d d d d d d d d d d d d d
professional standards also require that an audit be designed to provide reasonable assurance of detecting
d d d d d d d d d d d d d d d
material misstatements, due to errors or fraud. Particular emphasis is placed on the income statement
d d d d d d d d d d d d d d d
which is of great importance to investors. Auditing today also has the objectives ofmeeting the requirements
d d d d d d d d d d d d d d d d d
of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board
d d d d d d d d d d d d d d
for public companies.
d d d
1-9 The statement is incorrect. The increasing integrated databases of today, along with available
d d d d d d d d d d d d
auditprocedures make audited entire populations a possibility in many situations.
d d d d d d d d d d d
1-10 An operational audit attempts to measure the effectiveness and efficiency of a specific unit of an
d d d d d d d d d d d d d d d
organization. It involves more subjective judgments than a compliance audit or an audit of financial
d d d d d d d d d d d d d d d
statements because the criteria of effectiveness and efficiency of departmental performance are not
d d d d d d d d d d d d d
asclearly established as are many laws and regulations or generally accepted accounting principles.
d d d d d d d d d d d d d d
The report prepared after completion of an operational audit is usually directed to managementof
d d d d d d d d d d d d d d
the organization in which the audit work was done.
d d d d d d d d d
1-11 A compliance audit is an audit to determine whether financial reports or other assertions are in compliance
d d d d d d d d d d d d d d d d
with established criteria. The necessary ingredients are verifiable data and the existence of standards
d d d d d d d d d d d d d d
established by an authoritative body. An operational audit, on the other hand, is a review of adepartment or
d d d d d d d d d d d d d d d d d d d
other unit of a business or governmental organization to measure the effectiveness and efficiency of
d d d d d d d d d d d d d d d
operations. Internal auditors often perform operational audits as do auditors employed by the Government
d d d d d d d d d d d d d d
Accountability Office (GAO) of the federal government.
d d d d d d d
1-12 Internal auditors must be independent of the department heads and other line executives whose work
d d d d d d d d d d d d d d
theyreview. However, internal auditors are not independent in the same sense as a public accounting firm.
d d d d d d d d d d d d d d d d d
